Obama Seeks Farm Payment, Insurance Support Cuts

Source: Brock Associates | Feb 02, 2010

President Obama’s fiscal 2011 budget proposal, which was made public on Monday, calls for lower income caps on eligibility for federal farm programs, a reduction in the maximum amount of direct payments that producers can receive annually and a cut in federal support for crop insurance.

The Obama administration estimates $2.26 billion can be saved over a 10-year period by reducing federal farm payments to "wealthy farmers," while $8 billion can be saved by reforming the crop insurance program to end what it calls "huge windfall profits" for insurance companies.

The administration proposes to limit farm subsidies to "wealthy farmers" by reducing the adjusted gross income (AGI) caps on eligibility for crop payments by $250,000 and cutting the annual maximum for direct payments by 25% to $30,000/farmer.

The proposal would phase out federal crop subsidies to people with more than $250,000 in AGI from off-farm sources or more than $500,000 in on-farm AGI.

"This would allow USDA[3] to target commodity payments to those who need and can benefit from them most, while at the same time preserving the safety net that protects farmers against low prices and natural disasters," says the administration.

Such cuts are easier proposed than accomplished. The Obama administration sought tighter income limits on farm payments last year, as well, but met with no success.

There will be stiff opposition to changing farm payment rules again this year as many members of Congress think changes in the payment rules should be left for the next farm bill.

"It is Congress' job to write the annual budget, and based on my conversations with House[4] leadership, no one is interested in making cuts to the farm bill[5] after the battle we just fought to pass it a year and a half ago," House Agriculture Committee[6] Chairman Colin Peterson (D-MN) told Dow Jones Newswires[7].

Sen. Saxby Chambliss (R-GA), the ranking minority member of the Senate Agriculture committee[8], accused the Obama administration of "unfairly" targeting "farmers and ranchers to achieve savings" in its fiscal 2011 budget.

Backers of farm payment reforms say an effective tightening of the income caps would also require the rewriting of rules just published in the Federal Registry[9] by USDA defining what it means to be "actively engaged" in farming.

Meanwhile, the administration says the Standard Reinsurance Agreement[10], which is the master contract between USDA and crop insurance companies, can be renegotiated to so that USDA will be able to offer the same benefits to farmers and ranchers with significantly reduced costs.

The administration’s pursuit of crop insurance reforms is based on the results of studies commissioned by USDA’s Risk Management Agency[11] (RMA).

The studies, released in September 2009, estimated that between 1989 and 2008, crop insurers received an average annual return on equity of 17.1% from selling multi-peril crop insurance. It was estimated that a reasonable rate of return over that period for that business would be 12.8%.

Not surprisingly, the private crop insurance industry has blasted the RMA’s efforts to restructure the crop insurance program.

A group of 26 senators also recently sent USDA a letter asking it to back off on crop insurance reforms because some smaller insurers might be forced out of business.